Sustainability driven management practices-Finance

Need for Sustainable Credit Policy for Urban Co-operative Banks in India
with special reference to Personal Loan Product.

Saheelahmed Muzawar
MBA, M.Com, (Ph.D)
Assistant Professor
Anjuman Arts, Science & Commerce College & PG Centre,Bhatkal
(Contact: 91+9916801626, sm65sm@gmail.com)

Abstract: Urban Co-operative Banks have been set up with the objective of promoting
banking habits among lower and middle income groups in urban areas and purvey credit to small
borrowers including weaker sections of the society. Urban co-operative banks display a high
degree of heterogeneity in terms of deposits/asset base, area of operation and nature of business.
In view of their importance the sector should emerge as a sound and healthy network of jointly
owned, democratically controlled and professionally managed institutions. The sector showed
weaknesses out of lack of corporate governance, unethical lending and large loan defaults.
The operational efficiency specially in Personal loans are unsatisfactory and characterized by
low profitability, ever growing non-performing assets (NPA). The rate of growth in the personal
loan portfolio of banks has dipped to a larger extend, hence major UCBs have refrained from
growing their unsecured lending portfolio largely on account of deteriorating risk return ratio.
There is a immediate need to design healthy credit policy for UCBs to sustain its services in this
competitive banking sector. We cannot blame only a part of the credit process for the increasing
NPAs, but there is a need to critically understand whether the problem lies with the Policy
conditions, Approach to customer, Assessment of ability or Willingness pay, Confirmation of
employment, Collection of documents and the most important is Credit approval and Operations
process & file booking etc. Accordingly the UCBs can tightened the credit screening as per the
performance of the segment.

Introduction to Personal Loans

A Personal loan is credit that individuals can apply and get it from a bank or finance company
for the purpose such as wedding expenses, purchasing jewelry or gold, and vacations. Similar to
credit cards, these loans will usually have predetermined interest rates.
When taking personal loans in India, the customers dont provide genuine and true reason to the
finance company or lender about the use of the money. It is an unsecured loan, where the loans
and lending companies can provide the bank loan without any security or collateral. By applying
and getting a personal loan, borrowers can buy any asset for their home or use, plan a vacation or
use it for home improvement project. Personal loan is a simple hassle free process of acquiring
personal finance with minimal documentation and within quick time. The bank will require the
borrowers documents regarding the proof of identity, residence along with income proof / ITR
of last 2 years to initiate the process for loan sanction.

Need and Scope for the Study

The need of the research study is to know the sustainable credit appraisal policies adopted by
UCBs in personal loan category practiced in India, even though UCBs facing severe problems
which restricts their smooth flow of credit such as: Limited ability to mobilize resources, Liberal
and compromising credit policies, Low Level of recovery, High transaction cost, etc.

Objectives of the Study

1. To study the regular lending practices in personal loan product in UCBs
2. To study the problems in current credit policy of UCBs
3. To suggest the appropriate measures to improve the efficiency or financial health and
performance of personal loan portfolio in UCBs.

Research Methodology

Descriptive and exploratory research will be used in the study in order to identify the
credit appraisal, lending practices and risk management techniques of UCBs. The
method used will be questionnaire and interview of the experienced loan officers and
managers.

Reasons for Personal Loans

There are many reasons why people want and apply for personal loans in India. Some of them
might be:

To buy an asset

Debt consolidation

Going on an overseas vacation

Purchasing a vehicle

Marriage Expenses

Investing in jewellery

Paying off credit card bills, etc.

Benefits of Personal Loans

By checking around and applying for personal loans in India, borrowers benefit in several ways:

Using Loan for any use

These types of loans can be taken by the customer without mentioning a specific reason.
Bank loan amounts based on need are handed out by banks at specific interest rates to
most borrowers. These loans are made available at interest rates determined by the

market. Borrowers will have to sign off before they get the loan and repay the loan in
installments in the agreed upon time frame, as per the application.

No Collateral
As these loans are unsecured loans, there is no need to present any collateral or have a
guarantor to get personal loans in India. It is the borrower who is entirely responsible for
paying back the loan. Banks usually advance a bank loan by taking into account
information such as monthly income, type of employment, residence type, job history and
other related items. If the borrower meets the eligibility criteria, then the bank sanctions
the loan amount at the best available interest rates to the borrower. Borrowers can
calculate monthly installments using the financing calculator tool on the website which
they used to do a search.

Confidentiality
As far personal loans in India are concerned, the two main parties to the deal are the bank
and borrower. The amount and terms and conditions of a loan will have to be kept
discreet and confidential between the bank and the borrower. Lenders are bound by law
to keep bank loan information confidential.

Easy Repayment Options

EMI is the term used to describe the process by which a borrower repays the lending
institution or bank. It is possible for borrowers to get the loan period extended. Borrowers
can do this to reduce their monthly payment burden if they are going through a tough
period and want to get control of their financial situation. Borrowers can also choose to
get the loan terms changed and pay it off early. Decreasing the tenure will be a good idea
because the interest rates paid will be less of the total bank loan amount at the end of the
tenure.

The documentation for unsecured personal loans is far less than what is required for
home or car loans. Income proof and employment history certificate are the two
important documents needed to apply for bank loan for personal use.

Higher Loan Amounts

An applicant can receive higher loan amounts. The rate can vary from bank to bank, so it
pays to check and also negotiate with the lender. Depending on the applicants
requirements, repayment capacity and income the bank will sanction the loan amount for
the applicant applying for loans in India.

Factors considered by UCB's in India for deciding Personal Loan eligibility

1. Documents Verification: All the documents such as Income details, Address and ID details
must be collected in originals and need to be verified against the photocopies submitted to check
the genuine nature of the documents, which will strengthen the profile for the bank to go ahead
with further verification.
2. Financial Background: This is the most important parameter that determines whether the
customer is eligible for a personal loan and also the quantum of personal loan he is eligible for. It
will help the bank to understand how well the customer can pay back the loan amount. Every
bank will have a minimum level of income to be eligible for a personal loan.
3. Credit History: This will help the bank to ascertain the track record for payment of EMI of
any loan or the payment of the credit card bills. In case the customer have paid all his previous
EMIs and credit card bills on time, chances are there that he will leverage the debt timely.
4. Company in which we are employed: Personal loan eligibility may depend upon the
company where the customer is working for. In case the company is a public ltd or among the A

class companies, which the banks call them as, the chances are there to get a loan becomes very
easy. If the customer is working for a B class company, then getting a personal loan may be
difficult or it may be costlier also compared to a person who is working in an A class company.
Which means that if the customer is working for a company which belongs to the A class
according to the bank, and then the personal loan rate would be comparatively lower to a person
who belongs to a B class company.
5. Any other loans the customer may be holding: In case the customer having any other loan at
the given point of time, then the eligibility for personal loan may go down as we are already
paying towards EMI of the previous loan and the income at customers hand would be lower
compared to a case where the customer is not paying any EMI.

Problems in Current Credit Appraisal Policy of Personal Loans in UCBs.

1. Applications are incomplete: Most of the time Applications are not duly filled by the
customers or the executives who fill up the applications on behalf of customers, in a hurry to run
business they neglect some valid details which are left blank in application forms.
2. Outdated or Old address proofs: Outdated or Old address proofs are also collected to
process the files and sometimes prepaid telephone bills are also attached with KYC to process
for loan. When the same profile become delinquent, tracing the address will be a uphill task for
the bank.
3. Lack of document verification: Most of the UCBs do not have a proper documentation
requirement Matrix due to which fraudulent profiles are applying for the personal loans and even
most of them are approved for the loan amounts by the UCBs.
4. Lack of seriousness in Contact verification: Contact point verification at residence and
office address or telephone verification of office and residence numbers are merely become a

formality to fill up the details than a true verification, which leads to non availability of
customers once the loan amount is credited in their account.
5. Fail to understand the purpose and intension of loan: The customer who is taking a loan
has to be credit savvy enough to realize the implication of taking a loan. Most of the time the
credit lending officers or managers failed to understand the profile and there by the genuine
purpose
These are the broader areas where we find some alarming concerns which UCBs need to
improve, along with these we even find poor governance, poor guidelines for checking bank
statements, there is no fraud control unit to check the true picture of customer.

Suggestions for UCBs to avoid high delinquency and growing NPAs in

Personal Loan.
To have a healthy portfolio in our UCBs the credit heads have to have a razor sharp focus on
their profiles before they approve the loans to avoid high rate of delinquency in unsecured
products such as personal loans.
1. Proportion of balances to credit limits is too high on bank revolving or other revolving
accounts :
The score likely looks at customers total available credit limits and compares them to their
outstanding balances, individually and in the aggregate. The greater the percentage of their
available credit that they are using, the greater the impact to their scores. Theres no magic
number here, though. In other words, getting their balances below 30% or 50% of their available
credit doesnt automatically eliminate this factor.
2. Amount owed on accounts is too high :

This factor may look at their debt in comparison to other consumers, and if their debt is higher
than optimal, it could show up as a reason why the bank shouldnt approve or give more priority
for such highly burdened borrowers.
3. Too many inquiries in the last 12 months :
This reason appears when customers credit report indicates a high number of credit applications
(inquiries) within the last year. But not all are counted the same. Checking their own credit
reports doesnt count; nor do promotional inquiries, inquiries from employer and insurance
companies, and account reviews by their current creditors. The impact of inquiries on their credit
will vary, depending on their overall credit profile, but the typical inquiry can be expected to
impact their score by about 5 points.
4. Level of delinquency on accounts :
Delinquency refers to payments that were late. The general rule of thumb is that the higher the
delay in servicing timely payments, the greater the impact to such customers credit score.
5. Time since delinquency is too recent or unknown:
Recent late payments will have a greater impact on the credit score than older late payments.
Typically, those within the most recent year or two can hurt the scores the most. If an account
was delinquent a while ago, but the credit report doesnt indicate the date, this factor can pop up
as well and in this situation banks need to be more alert.
6. Serious delinquency, derogatory public record or collection filed:
This can mean that the customer's credit report includes a bankruptcy, judgment, tax lien or
collection account. Bankruptcy remains on the report for 10 years from the date of its file; paid
judgments can be reported for 7 years but unpaid judgments can stay on there even longer; paid
tax liens are removed 7 years after being paid, but unpaid tax liens can remain on the report

indefinitely; while collection accounts may be reported seven years and 180 days from the date it
first fell behind with the original creditor leading up to the account being turned over to
collections.
7. No recent revolving balances (or no recent bankcard balances)
This reason may appear when the credit report doesnt include any revolving accounts (usually
credit cards), or when all the credit cards closed or are no longer being reported. If the customer
have open credit cards, it may also appear when there are no balances on those accounts.
8. Lack of recent installment loan information:
When customer had a mortgage and it was paid off years ago, pay cash for his car, or he dont
have any outstanding student loans. Guess what? The fact that the customer is ultra-responsible
here doesnt help his credit scores, but banker needs to check this case very carefully from he
time he downloads this report by filling up the KYC details. If the score is genuinely low then
banker can go ahead with the case.
9. Too many consumer finance company accounts.
Consumer finance companies make relatively small personal loans, usually limited to several
thousand, and quite often at interest rates higher than those on most credit cards. Consumers who
rely heavily on consumer finance company accounts tend to be riskier to lenders than consumers
who do not have any.
10. Negative/Restricted profiles should not be entertained:
Loans to customer in restricted profession as per the past experience and analysis will not be
offered. However if the customer has at least one year loan track record of a sound EMI from a
approved financer then the case can be treated in a deviation.

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